President Trump’s comments on the dollar triggered a spike in GBP/USD. Image: Official White House Photo by Daniel Torok.
U.S. President adds to the dollar’s woes.
The pound to dollar exchange rate (GBP/USD) retraces some of its recent gains as technical indicators point to the move being significantly overdone.
A broad selloff in the dollar took GBP/USD to 1.3869 on Tuesday, its highest level in four years.
However, the pace of appreciation has been unusually rapid and the RSI on the GBP/USD daily chart reached a peak at 77 on Tuesday.
A level above 70 is consistent with overbought conditions and warns of an imminent mean reversion back below 70 that would require a pullback and consolidation in the spot exchange rate.
Analysts think the pullback should be relatively short-lived and that the outlook is firmly in favour of further USD losses.
“We prefer selling USD rallies as we view USD debasement as an ongoing structural risk, and events today may allow us to get better levels,” says Sarah Ying, FX strategist at CIBC Capital Markets.
Above: GBP/USD at daily intervals with RSI in lower panel.
Dollar losses accelerated on Tuesday amidst growing market fears that U.S. authorities were actively seeking a weak-dollar policy.
“I think it’s great,” said U.S. President Donald Trump on Tuesday in response to a question regarding the currency’s slide.
Analysts say the comments solidified the view that authorities were actively encouraging USD weakness.
“Trump’s comments yesterday (that he is unconcerned about USD weakness) could drive broader USD selling even if the yen stabilises,” says Ying.
The dollar first sold off in earnest on Friday when it was revealed U.S. authorities were coordinating with Japanese counterparts to try and boost the yen and devalue the dollar.
The coordination confirmed the Trump administration was ready to use dollar weakness as a tool to rebalance the domestic economy in favour of exporters and reduce the country’s massive trade deficit.
“Underpinning negative attitudes towards the USD have been fears that Trump is at heart a USD bear given his desire to rebalance the US trade deficit,” says Jane Foley, Senior FX Strategist at Rabobank.
